Kazakhstan Unexpectedly Cuts Rates as Inflation Risks Abate

Updated on
  • Cut in benchmark to 15% surprised most economists in survey
  • Inflation is peaking as economy risks first decline since 1998

Kazakhstan’s central bank cut its key interest rate for the first time since introducing it last year as policy makers look to curtail gains in the tenge and inflation risks subside.

The base rate, set as the new benchmark after the central bank abandoned its currency peg in August, was decreased to 15 percent from 17 percent, policy makers in Almaty said in a website statement on Thursday. One of five economists surveyed by Bloomberg forecast the move, with three predicting no change and another seeing a cut to 16 percent.

“The risks of higher inflation from the side of aggregate demand are assessed as insignificant,” the central bank said in the statement. “The level of economic activity remains low.”

The economy of the second-largest energy producer in the former Soviet Union is at risk of its first annual contraction since 1998, with the Kazakh currency’s rebound prompting the central bank to intervene in the market to buy dollars. While the tenge has stabilized after the world’s second-worst performance last year, currency weakness has fed into inflation, sending annual price growth to 16.3 percent in April, the fastest in eight years and more than double the central bank’s target.

Third Downgrade

Kazakhstan was cut to the second-lowest investment grade by Fitch Ratings last week, the country’s third downgrade in three months after the tenge plummeted to a record low in January amid a downturn in oil. The economy will probably contract by 1 percent in 2016, according to Fitch.

The central bank’s decision is “logical, especially taking into account big pressure on the regulator from businesses to cut rates,” Murat Temirkhanov, head of research at Halyk Finance, said by e-mail.

Among its post-Soviet peers this quarter, the Kazakh currency is the third-best performer against the dollar with a gain of 3.7 percent, according to data compiled by Bloomberg.

The central bank also said it narrowed its rate corridor to plus or minus one percentage point. The overnight deposit and lending standing facility rates form a corridor around the new benchmark. The next rate announcement is scheduled for June 6.

Policy makers warned that growth in tenge liabilities as a result of high rates is “leading to an increase of risks to financial stability.” The regulator in February raised the recommended rate for retail deposits denominated in tenge to 14 percent.

“Falling inflation will help the National Bank of Kazakhstan to proceed with the policy easing to unfreeze credit activity needed for a better economic outlook,” said Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow.